Overpayment of distribution to participant

[Guest tajcc]

If there was an error on the TPA's part where a participant's vesting schedule was not applied correctly and there was an overpayment of the distribution to the participant in the amount of $2,500.00 - the TPA is going to cut a check including earnings to the plan's forfeiture account as they cannot obtain the overpayment back. Does this warrant going through a formal submission to the IRS or would this fall within the self correction program? Thank you.

[mming]

Maybe it would be simpler for the TPA to pay the employer and then have the employer make a restorative payment to the plan. I imagine the TPA could be considered a party in interest since it provides services to the plan and a prohibited transaction could be created if they make a deposit. I've seen employers make restorative payments without going through any IRS correction programs, however I'm not sure whether that's OK.

[Guest dbvail]

I agree. More to the point, the plan administrator (employer) is the only entity that can make the payment. Where they get reimbursed from is secondary. At least as I see it.

[Guest Sieve]

I would agree with mming that this probably is a restorative payment (made to repay the plan for losses due to a breach of fiduciary duty). Neither the 2006 EPCRS nor the new 2008 EPCRS specifically mentions restorative payments, but the 2008 EPCRS provides that it will consider DOL-approved corrections as appropriate corrections to similar violations under EPCRS (Section 6.02(2)(e)(iii))--but I don't see a restorative payment as correcting any EPCRS-covered failures (other than, perhaps, a failure to follow the plan's terms, if the terms specifically prohibit breaches of fiduciary duty). DOL's VFCP does not mention fiduciary breach restorative payments as a correctable fiduciary breach. So, I think this is just a correction that is made in the same manner that a PT would be corrected to prevent the 100%-level tax--just fix it as best you can. But, I think the correction should also include any lost earnings while the $$ were not in the plan.

[Guest tajcc]

Thank you all for the replies. So say the TPA pays the employer for their mistake including earnings. For the proper correction of the accounts - does the plan administrator/trustee have to submit formally to the IRS for approval through EPCRS?

[Guest Sieve]

Looking at this again, it probably can be characterized as payment of an excess amount (i.e., more than the participant was entitled to receive), and that can be self-corrected. It should be repaid with interest and otherwise meet EPCRS requirements (including informing the participant that the excess amount he/she received is not eligible for rollover treatment). May also require revision of 1099-R, but I don't know for sure.

[Kimberly S]

The excess was not eligible for rollover. Along with the attempt to recover the payment the participant must be notified of that fact.